4 Chapter Preventing Fraud
MULTIPLE CHOICE 1. The default model that deals with fraud has which of the following stages a. Fraud incident b. Action c. Resolution d. All of the above ANS: D D: Correct- all of them are in the default model of fraud 2. The following are (is a) good control(s) for preventing fraud a. Physical control/proper authorization b. Segregation of Duties c. Independent checks d. Documents and records e. Both A and B ANS: E A: B is also correct B: A is also correct 3. The responsibility for preventing fraud is often seen as belonging to: a. The internal auditors b. Corporate security c. The external auditors d. Managers e. Someone else ANS: E A: A is incorrect because the internal auditors argue that their function is to evaluate controls and to improve operational efficiency. They will support a fraud investigation, but it isn't their primary responsibility. B: B is incorrect because corporate security believes that theirs is an investigative role and that they are responsible for pursuing reported frauds, not deterring them. They don't focus on prevention or detection. C: C is incorrect because the external auditors maintain that they can't detect fraud because it isn't their responsibility and because their materiality levels are too high. D: D is incorrect because managers view their primary responsibility as "running the business" and seldom acknowledge the possibility that fraud can occur in their organization. E: E is the correct answer. 4. The majority of frauds are committed by: a. Someone acting alone. b. Two or more people acting together. c. Teenagers with long hair. d. Investment scams. ANS: A A: Correct - It is estimated that about 71 percent of frauds are committed by sole perpetrators. B: Incorrect - Conversely, only about 29 percent of frauds involve collusion.
C: Incorrect - This is a simple stereotype with no proven evidence. D: Incorrect - This is a possible fraud type, but the majority of frauds are not committed by this method. 5. Most frauds are committed by a. Individuals b. Groups ANS: A A: A is correct B: B is incorrect, only 29% of frauds involve collusion-therefore we must focus on the individual 6. Having a manager watch over employee's shoulders is a good example of: a. Discouraging collusion b. Monitoring employees c. Creating an expectation of punishment d. None of the above ANS: D B: Correct: Watching over shoulders doesn't work as well as other methods of internal controls (A), video cameras (B), and punishing fraudulent activities (C). 7. The following elements are crucial in creating a culture of honesty except: a. Hiring qualified individuals b. Implementing employee assistance programs c. Developing an organizational code of conduct d. Promoting an open-door policy ANS: A A: Hiring qualified individuals does not mean the individuals are honest. Effectively screening applicants by obtaining credit histories, fingerprinting new employees or hiring private investigators are all ways to screen new employees. B: Implementing EAPs helps employees deal with pressures and helps to create a culture of honesty. C: Developing (and communicating) an organizational code of conduct is also an effective way to create a culture of honesty in an organization. D: Promoting an open-door policy gives employees an opportunity to talk to other people about their problems and helps alleviate pressure. 8. Even with the best possible internal control system in place, its effectiveness still depends on what? a. Creating an expectation of punishment. b. Identifying the nature of the risks involved and the losses that could result from these risks. c. The competency and dependability of the people enforcing it. d. All of the above. ANS: C A: Incorrect - This is an important aspect of deterring fraud, but it doesn't ensure that internal controls will be effective. B: Incorrect - This is a way to determine what kind of control activities an organization should have in place - not a way to enforce controls. C: Correct - It is vital that the people enforcing the controls are competent or else opportunities for fraud will be available. D: Incorrect - This is, by prior elimination, incorrect. 9. In order to minimize fraud, a fraud-savvy organization should:
a. Not prosecute the fraud perpetrator to avoid publicity b. Minimize the fraud's impact on the organization by not talking about the fraud in the organization c. Trust its employees by reducing monitoring of employees in order to regain employee moral after fraud detection d. Develop and promote a company code of conduct ANS: D A: This does not help to prevent future fraud because there is no expectation of punishment B: The organization should educate and train employees to be aware of similar fraud. C: Even if the organization trusts its employees, it should not let controls down. 10. True or False. Internal controls are "fraud proof". a. True b. False ANS: B B: No internal control structure can ever be completely fraud proof. Effectiveness of internal controls depends on the competency and dependability of the people enforcing it. 11. What is the most likely way to deter fraud? a. Interview every employee on a regular basis b. Implement a good system of controls c. Keep management involved in company procedures d. Threaten employees that perpetrators will be fired ANS: B A: Incorrect - interviewing is not the best way to deter fraud B: Correct C: Incorrect - Management can also be involved in fraud so this is not the best way to deter fraud D: Incorrect - Employees already know that if they are caught in a fraud, they will most likely be fired 12. Which of the following is not a red flag that a person, with a salary of $50,000 per year is living above his or her lifestyle? a. A person owns several expensive cars b. A person closely monitoring their investments c. A person who hosts extravagant parties in their $500,000 home d. A person who owns a multimillion dollar art collection ANS: B A: Most people can just afford 1 or 2 average cars B: Just because a person is interested in how their savings are performing doesn't mean they've committed fraud C: This sounds like more than such a person could afford D: Very unlikely for a person living on $50k 13. Collusion involves which of the following? a. Employees working with other employees in the company b. Employees working with others outside the company, such as vendors c. All of the above d. None of the above ANS: C A: Yes, collusion involves two or more employees who have responsibilities that are intended to be separated
B: Yes, this kind of fraud includes bribes and kickbacks C: Correct D: Wrong 14. The best way to limit opportunities for committing fraud in an organization is to: a. Establish clear vendor policies b. Create a tip hotline c. Maintain good internal controls d. Monitor employees ANS: C C: Internal controls if properly set up and enforced, are the most effective way to reduce the opportunity (and perception of opportunity) for fraud. 15. Developing and promoting a company code of conduct is one aspect of which area of a fraud-savvy organization? a. Integrity and risk controls b. Education and training c. Tone at the top d. Conducting Proactive auditing ANS: C A: Incorrect-Integrity and risk controls focus more on internal controls B: Incorrect-Education and training consists of instructing vendors, other outsiders, and employees about company expectations C: CorrectD: Incorrect 16. Which of the following is not a possible fraud prevention strategy/technique? a. Including "right-to-audit" clauses on purchase invoices. b. Instigate a zero tolerance policy with regards to fraud in the workplace. c. Effectively screen potential employees. d. All of the above are possible fraud prevention strategies/techniques. ANS: D A: The other answers are also true B: The other answers are also true C: The other answers are also true 17. Which of the following is not a good way to eliminate opportunities for fraud? a. Install good internal controls b. Discreetly and quietly terminate employees who have been caught c. Discourage collusion d. Monitor employees ANS: B B: Those who have been caught should be publicly disclosed in order to let other employees know that fraud will not be tolerated. 18. Approximately, what percentage of frauds are committed by people acting alone? a. 30% b. 50% c. 70% d. 90%
ANS: C C: Correct 71% of all frauds are committed by individuals acting alone. The remaining 29% involve collusion and are not only difficult to detect, they often involve the largest thefts. 19. Which is not an operating condition that can contribute to a higher risk of fraud? a. Management by crisis b. Low company loyalty c. High Morale d. Comparatively low compensation ANS: C C: High morale is not considered a condition that increases fraud risk. 20. The key factors of a good internal control system includes a. Accounting system including information that is valid, complete, and timely b. Physical control of assets c. Segregation of duties d. All of the above ANS: D D: Correct 21. Fraud is prevented and reduced by: a. Creating a culture of honesty, openness, and assistance b. Terminating employees without prosecution c. Eliminating opportunities to commit fraud d. Both A and C ANS: D A: A is incorrect because both A and C are correct. B: B is incorrect because terminating employees without prosecuting them will likely increase the likelihood of fraud in your organization. As employees see the lack of punishment for fraud, they will feel more comfortable committing fraud and will easily rationalize that "the punishment won't be bad." C: C is incorrect because both A and C are correct. D: D is correct. 22. What is the last step in the "Dealing with Fraud" Model a. Detection b. Resolution c. Investigation d. Action ANS: B A: A is not a part of the model. B: Correct C: C is incorrect. D: D is incorrect. 23. Which of the following is not a way to eliminate the opportunity to commit fraud? a. Establish a code of ethics b. Monitor employees c. Create an expectation of punishment d. Discourage collusion ANS: A
A: Correct 24. Which business trend(s) increase the likelihood of fraud: I- Increasing complexity of business II- Fewer paper trails & more Oral agreements a. I only b. II only c. I & II d. Neither I or II ANS: C A: A is incorrect because the increasing complexity of business and fewer paper trials BOTH increase the likelihood of fraud B: B is incorrect because the increasing complexity of business and fewer paper trials BOTH increase the likelihood of fraud C: Correct D: D is incorrect because the increasing complexity of business and fewer paper trials BOTH increase the likelihood of fraud 25. Which factors are crucial in creating a culture of honesty, openness, and assistance? a. Hiring honest people and training them in fraud awareness b. Creating a positive work environment c. Disseminating a well understood and respected code of conduct or ethics d. All of the above ANS: D A: Other answers are also true B: Other answers are also true C: Other answers are also true 26. The following must be done before a proactive program that looks for fraud symptoms is built: a. Investigate fraud symptoms. b. Identify risk exposures. c. Identify fraud symptoms. d. Two of the above. e. None of the above. ANS: D A: Incorrect. To be proactive, a program that looks for fraud symptoms must be in place before fraud symptoms are investigated. B: Incorrect. C: Incorrect. D: Correct. E: Incorrect. 27. Unfortunately, the responsibility for preventing fraud is often seen in many organizations as belonging to: a. The internal auditors b. Corporate security c. The external auditors d. Managers e. Someone else ANS: E
A: The internal auditors argue that their function is to evaluate controls and to improve operational efficiency. They will support a fraud investigation, but it isn't their primary responsibility. B: Corporate security believes that their responsibility is an investigative role and that they are responsible for pursuing reported frauds, not deterring them. They don't focus on prevention or detection. C: External auditors maintain that they can't detect fraud because it isn't their responsibility and because their materiality levels are too high D: Managers view their primary responsibility as "running the business" and seldom acknowledge the possibility that fraud can occur in their organization 28. Which of the following is a sign of a positive work environment? a. Yearly turnover of hourly employees exceeds 25% b. Company returns that consistently beat the industry average c. Departments cut work parties to keep within their budget d. Employees work long hours because they care about the company ANS: D D: Correct: High turnover (A) and tight budgets (D) are signs of negative work environments. Consistently beating industry averages (B) may be a sign of aggressive leadership or financial statement fraud. Employees working long hours is not positive if employees feel forced; (D) discusses reason for long hours which is employees care about the company. 29. Approximately _____ of all frauds are committed by individuals acting alone. The remaining _____ involve collusion and often involve the _____ thefts. a. 70%, 30%, smallest b. 70%, 30%, largest c. 30%, 70%, smallest d. 30%, 70%, largest ANS: B B: Correct 30. An employee has five new cars and a gold watch. These facts would be considered: a. Lifestyle symptoms b. Accounting anomalies c. Tips and complaints d. Analytical symptoms ANS: A A: Correct 31. Fraud is most commonly detected by: a. Monitoring employees b. Investigating identified symptoms c. Discouraging collusion d. Tips and complaints ANS: D A: Monitoring is not the most effective method to detect fraud, however this method does sometimes reveal fraud B: This is not part of the detection phase of fraud audit C: This results from fraud detection and investigation but is not a method to detect it 32. Even with internal control procedures in place, many companies routinely experience fraud for all of the following reasons except:
a. b. c. d.
Management overrides controls. Control procedures are not followed. Control procedures are not effective fraud-prevention tools Lack of rewards for complying with control procedures.
ANS: C C: Control procedures are effective fraud prevention tools, but only if they are strictly followed. Even management should not be permitted to override the controls 33. Eliminating opportunities for fraud includes all of the following except: a. Installing good internal controls b. Monitoring employees c. Alerting vendors and contractors to company policies d. Hiring honest people ANS: D A: A is incorrect because installing good internal controls is the most widely recognized way to eliminate opportunities to commit fraud. Good controls not only discourage the perpetration of fraud and limit the opportunities for but fraud, also limits the exposure if fraud does occur. B: B is incorrect because monitoring employees does eliminate some of the opportunity to commit fraud. When employees are monitored, they likely feel less free to commit fraud and are less likely to see available ways to commit fraud. Also close monitoring facilitates early detection. C: C is incorrect because a letter alerting vendors of company policy will eliminate some of the opportunities that purchasers may have to collude with vendors. This letter will help the vendors understand whether company buyers and sellers are acting in accordance with the rules. D: D is correct. (Hiring honest people is not part of eliminating the opportunities for fraud, but is part of creating a culture of honesty, openness, and assistance). 34. Each of the following personnel policies, operating conditions, and procedures appear to contribute to a high fraud environment EXCEPT: a. Perceived inequalities in the organization and inadequate pay. b. Inadequate expense accounts and unreasonable budget expectations c. Proactive management d. Managers with impulsive, insensitive, dominant, or emotional personalities e. High employee turnover. ANS: C C: Answers a, b, d, and e can lead to disgruntled employees who develop motives to commit fraud. If management is proactive, however, there will be an open line of communication between management and the employees and most employee frustration will be resolved before someone decides to commit fraud. 35. What two business trends are likely to increase collusion fraud? a. Emphasis on quarterly earnings targets from analysts b. Elimination of middle management c. Closer relationships between buyers and suppliers d. Increasingly complex nature of business ANS: C A: Incorrect - This may result in management fraud, but not likely in collusion fraud B: Incorrect - This may actually decrease collusion fraud C: Correct D: Correct 36. Which of the following is NOT one of the four steps involved in good proactive fraud auditing?
a. b. c. d.
Identifying risk exposures Conducting substantive test of account balances Building audit programs that proactively check for symptoms and exposures Investigating identified symptoms.
ANS: B A: Incorrect, because it is one of the four steps B: Correct. The second step should be identifying the fraud symptoms for each exposure, not detailed testing. C: Incorrect, same reason as a D: Incorrect, same reason as a 37. _________ focuses more on creating a culture of openness than eliminating opportunities. a. Proactive auditing b. Installing good internal controls c. Monitoring employees d. Creating a positive work environment ANS: D D: Correct 38. To discourage collusion, companies should: a. Send letters to vendors and contractors b. Require mandatory job transfers c. Regularly review employees who are responsible for large contracts or accounts d. All of the above ANS: E A: Sending letters to vendors and contractors discourages collusion by informing outsiders about the company's policies regarding gifts, etc. B: Requiring mandatory job transfers when risks regarding collusion are present also discourages collusion. C: Reviewing employees who are responsible for large accounts will also discourage collusion. D: All of the above will help discourage collusion 39. True or false: The majority of frauds committed against companies involve collusion. a. True b. False ANS: B B: Correct: Over 70% of frauds are committed by individuals acting alone.
40. The last step in the "fraud savvy" model for dealing with fraud includes follow-up. What is a likely outcome when a company allows perpetrators to go un-prosecuted? a. The company will avoid bad publicity b. The perpetrator and others in the company will commit fraud again in the future c. The perpetrator will be saved from pain and embarrassment and having learned his or her lesson will not commit fraud again d. Management will send a signal that fraud will not be tolerated ANS: B A: Because fraud is so common, bad publicity is not a result of fraud prosecution. Bad publicity may result from fraud that occurs from a perpetrator that was not prosecuted.
C: The perpetrator will commit fraud again D: Management will send a signal that they do not deal harshly with fraud. 41. Which of the following is not a factor of fraud prevention? a. Hiring honest people and training them in fraud awareness. b. Creating a positive work environment. c. Disseminating a well-understood and respected code of conduct or ethics. d. Providing employees with salaries above the industry norms. ANS: D A: This is a factor in fraud prevention B: This is a factor in fraud prevention C: This is a factor in fraud prevention 42. The single most effective tool in preventing and detecting fraud is a. Proactive fraud auditing b. Tip hotlines c. Creating an expectation of punishment d. Good internal controls ANS: D A: Incorrect-Fraud auditing creates awareness among employees that their actions are subject to review at any time, however, this is not the most effective tool. B: Incorrect-Although fraud is most commonly detected through tips; it is not a preventative tool-. C: Incorrect-While fear of punishment is a good deterrent of fraud; it is not the most effective tool in preventing fraud-. D: Correct-Good internal controls are the most effective tool for preventing fraud-. 43. Proactive fraud auditing involves identifying ___________ exposures and identifying the fraud ___________ for each exposure. a. Risk, symptoms b. Audit, losses c. Financial, consequences d. Theft, acts ANS: A A: Correct 44. Given all of the following fraud prevention methods within organizations, which of the following is probably the most effective? a. Having an open-door policy b. Screening employees c. Increasing the perception of detection d. Reducing rationalization ANS: C A: Incorrect B: Incorrect C: Correct; increasing the perception of detection is the best answer D: Incorrect 45. Which of the following should be emphasized in an employee-reporting program? I. Fraud, waste, and abuse occur in very few companies.
II. The company actively encourages employees with information to come forward. III. The employee's name must be disclosed. IV. The report need not be made to one's immediate supervisor. a. II and III. b. I, II, III, and IV. c. I, II, and IV. d. II and IV. ANS: D D: II & IV are correct 46. What's the best method to reduce collusion? a. Mandatory vacations b. Monitoring employee interaction c. Job transfers d. A & C ANS: D A is also correct C is also correct 47. Which of the following is usually the most effective tool in preventing and detecting fraud? a. Discouraging collusion b. Investigation of fraud symptoms c. Internal controls d. Strict policies of investigations and punishment ANS: C A: Incorrect B: Incorrect C: Correct, internal controls is the most effective tool in preventing and detecting fraud D: Incorrect 48. Which is not a good internal control? a. Mandatory vacations for all bank employees b. Having only one manager with access petty cash c. Keeping pre-authorized General Ledger tickets on hand d. B and C ANS: D A: is a good internal control B: also correct C: also correct D: correct 49. Which is not a good measure of fraud detection? a. Analyzing employee spending habits b. Having a 1-800 for anonymous tips c. Including a "right-to-audit" clause on the back of all purchase invoices d. All of the above are good detection measures ANS: D D: Correct; all of the above are good detection measures 50. What method results in the biggest savings?
a. b. c. d.
Prevention--including EAP plans Detection--including audit proactively, monitoring Investigation--including criminal prosecution All are equally effective in saving money
ANS: A A: Correct; prevention results in the biggest savings B: Incorrect C: Incorrect D: Incorrect 51. Random auditing for fraud a. Creates an awareness of monitoring among employees b. Can be less-cost effective c. Is required by Sarbanes-Oxley d. All of the above ANS: A A: Correct B: Incorrect C: Incorrect D: Incorrect 52. Fraud prevention saves the most money because __________. a. No fraud means no investigation cost b. No fraud means no detection cost c. No fraud means no litigation cost d. All of the above ANS: D D: Correct 53. Fraud is most commonly detected through __________. a. Tips b. Advances in technology c. Confessions d. Internal audits ANS: A A: Correct B: Incorrect C: Incorrect D: Incorrect 54. The correct order of the six elements of Fraud-Savvy Organizations is: a. Tone at the Top, Education and Training, Proactive Detection, Integrity Risk and Controls, Reporting and Monitoring, Investigation and Follow-up b. Tone at the Top, Education and Training, Integrity Risk and Controls, Reporting and Monitoring, Proactive Detection, Investigation and Follow-up c. Education and Training, Integrity Risk and Controls, Reporting and Monitoring, Proactive Detection, Investigation and Follow-up, Tone at the Top d. Education and Training, Tone at the Top, Integrity Risk and Controls, Reporting and Monitoring, Proactive Detection, Investigation and Follow-up ANS: B
B: Correct 55. Frauds are most often committed by __________. a. One person acting alone b. Collusion among co-workers c. Repeat offenders d. None of the above ANS: A A: Correct, frauds are most often committed by a single individual B: Incorrect C: Incorrect D: Incorrect 56. A company's code of ethics should __________. a. Clarify expectations b. Reinforce employee understanding of appropriate behavior c. Underscore the importance of ethics to the company d. All of the above ANS: D D: Correct 57. A "right-to-audit" clause a. Alerts the company that a vendor reserves the right to audit the company's books at any time b. Gives an external auditor the right to audit the company c. Should not be used because it isn't an effective tool in fraud investigations d. Alerts vendors that the company reserves the right to audit the vendor's books at any time. ANS: D A: Incorrect B: Incorrect C: Incorret D: Correct 58. When only a very small amount of money has been embezzled, a. Taking no action is the best course of action b. The perpetrators should be punished by publishing the details of the fraud in the local newspapers c. The perpetrators should be prosecuted d. The company should either fire the perpetrator or transfer the perpetrator to a position with more supervision. ANS: C C: Correct; the perpetrator should be prosecuted regardless of the amount of money embezzled. 59. The principle mechanism for deterring fraud is internal controls. The primary responsibility for establishing and maintaining these controls rests with a. The internal auditors b. Management c. Corporate security d. Independent auditors ANS: B
A: Incorrect B: Correct C: Incorrect D: Incorrect 60. Which elements of the fraud triangle need to come together before fraud is likely to occur? a. Perceived pressure and perceived opportunity b. Perceived opportunity and rationalization c. Perceived pressure and rationalization d. All elements must be present ANS: D D: Correct; all elements must be present 61. What is the single greatest factor in deterring dishonest acts? a. Fear of punishment b. Fear of job loss c. Employee education and training d. Knowing that the company has whistle-blowing programs in place ANS: A A: Correct B: Incorrect C: Incorrect D: Incorrect 62. Jim is a crook. He embezzled $450,000 from his employer. The day Jim's employer found out
about his misdeeds but before it conducted a thorough investigation it went to the newspaper and told the publisher all about it. The next day Jim read his own story, with his own name, in the newspaper. Which of the following is correct?
a. The company did the right thing publishing Jim's identity in the newspaper be-
cause it both punished him for steeling and served as a warning to his neighbors who might also be at risk of being defrauded. b. The company should not have put Jim's name and story in the paper because if other employees know there is fraud in the company they will likely quit and go to work for someone else. c. Jim may have been misrepresented by the story in the newspaper and the company may be liable for slander. d. Publishing the story in the newspaper was the wrong thing to do because only employees should know about the fraud and, more especially, who their co-worker fraudster is.
ANS: C A: Incorrect B: Incorrect C: Correct D: Incorrect 63. Who has the primary responsibility for establishing and maintaining controls? a. Primary responsibility for controls belongs to internal auditors. They are the ones
who create the controls and investigate potential violations of the controls.
b. Primary responsibility rests with management. Management both conveys accept-
able culture and has the final say in how fraud cases are treated.
c. Primary responsibility lies with employees. They are the ones most likely to wit-
ness violations and are responsible to watch for those violations.
d. Primary responsibility is not attributable to one person or group of people within
an organization. Each member of an organization must consider himself or herself personally responsible for the organizations control environment.
ANS: B A: Incorrect B: Correct; primary responsibility rests with management C: Incorrect D: Incorrect 64. Which is the following is not one of the four factors in fraud prevention that are crucial in
crating a culture of honesty, openness, and assistance:
a. b. c. d. e.
Hiring honest people and training them in fraud awareness Providing employee assistance programs (EAPs) Creating a positive work environment Paying the employees higher wages All of the above are factors in fraud prevention
ANS: D A: Incorrect; This is one of the four factors B: Incorrect; This is one of the four factors C: Incorrect; This is one of the four factors D: Correct A: Incorrect 65. Deciding to not prosecute a fraud perpetrator should be a possibility when: a. The perpetrator sincerely apologizes and pays back management the entire amount
that he or she fraudulently took.
b. The company the perpetrator stole from is so small that it would not be cost-effect-
ive to hire a lawyer.
c. Top management has taken care of the issue privately, and the perpetrator has been
fired.
d. Deciding not to prosecute should never be a possibility. ANS: D D: Correct; fraud perpetrators should always be prosecuted. 66. What does the acronym "EAP" stand for? a. Entrepreneurial Assistance Program b. Employee Assistance Program c. Ethical Assistance Program d. Employee Anti-fraud Program ANS: B B: Correct
67. What are key attributes for a low-fraud environment? a. b. c. d.
Rules, consequences, and fear Recognition, remorse, and restitution Honesty, openness, =and assistance Opportunity, incentive, and rationalization
ANS: C A: Incorrect B: Incorrect C: Correct D: Incorrect